Overview: Analysis of Competitive Markets
• Brief Review
– Market Equilibrium and Surplus
– Examples: Welfare Analysis of Government Intervention
• Tax
• Quota
• The US Sugar Price Support Program
– How does it work?
– Who are the winners and losers?
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Market Equilibrium and Surplus
Concepts: Market Equilibrium
• Demand, Supply, Market Equilibrium
• Consumer Surplus, Producer Surplus
• Total Revenue
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Example: Imposition of a Tax
Concepts: Imposition of a Tax
•
•
•
•
•
•
Two Prices: Before and After Tax
Equilibrium
Consumer and Producer Surplus
Government Revenue
Dead Weight Loss
Incidence of a Tax (Who pays?)
– Fraction ‘paid’ by buyers is
– “Pass Through Formula”
Es/(Es – Ed)
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Example: Imports
Concepts: Imports
• Elastic World Supply
• Total Supply
• Equilibrium
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Example: Import Quota
Concepts: Import Quota
• Impact of an Import Quota
• Tariff and Import Quota Equivalent or Not?
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The U.S. Sugar Price Support Program
• How do market stabilization prices work?
• Aims of sugar price support program?
• Why quota rather than a tariff?
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Analysis of U.S. Sugar Program
• Quantify transfers and deadweight losses.
• Objective:
– Get practice with market analysis
– Determine winners and losers
– Get idea of the size of the effects
• (Simple) Modeling of the sweetener market
– Using 2000 data, assumptions as given before.
– Assume sugar and HFCS are perfect substitutes
– Need Demand, Supply, etc.
Assumptions: Analysis of U.S. Sugar Program
Market for sweetener with HFCS
• Es = 1.53, Ed = -0.3
• Q(demand)
= 38.6 bil lbs
• Q(sugar supply) = 19.4
• Q(hfcs supply) = 15.7 at a price of 11.3c
– hfcs supply perfectly elastic on 1-15.7 bil. lbs.
– hfcs supply perfectly inelastic above 15.7 bil. lbs.
• Ignore Canada
• Use US cents/lb
• World price = 11c/lb. US price 21.8c/lb.
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US Sugar Program - 2000 Data
• Domestic Demand for Sweetener
– QUS = 20.2 + 18.4 = 38.6 bill. lbs; P = 21.8c/lb; Ed = -0.3
– “Back of the Envelope” Approach:
P ∂Q
Q
⇒ b = Ed *
Q ∂
P
P
a = Q − bP
Ed =
– So b = -0.3*38.6/21.8 = -0.53; a = 38.6-(-0.53)*21.8 = 50.1
Qd = 50.1 - 0.53 P
• Domestic Supply for Sugar
– By Same Method: Qs = -10.3 + 1.36 P
– Namely,
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Sugar + HFCS =
Sweetener Supply
P
P
P
Qs
11.3
Qs
15.7
QHFCS
5.1
20.8
QTOT
HFCS:
– 0-15.7 perfectly elastic supply
– >15.7 perfectly inelastic supply
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Analysis of the Quota in the Sweetener Market
P cents/lb
Supply
21.8
A3
E
A1 D
A2
11.3
B1
11.0
B2
F
C
Demand
4.6
8.1
8.6
24.3
38.6
44.3
Q bil/lbs
Surplus Analysis: Highlights
• Extra Producer Surplus for Domestic Firms = A1 + A2 + A3
= $1.3 bil (non HFCS)
• Surplus on HFCS = E = $1.65 bil
• Extra Cost of Domestic Production = B1+B2 = $794 mil
• Change In Consumer Surplus = A+B+C+D+E+F = $4.48 bil
• Revenue to Importers = D = $378 mil
• Deadweight Loss = B+F+C = $1.15 bil
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Surplus Analysis in Practice
• More Extensive Analysis Involves Data and
Econometric Estimation of Equations
• Example: Demand for Sweetener in Candy Production
ln(Qsweet) = 2.83 - .32 ln(Psweet) + .62 ln(CandyShip)
– Annual Data, 1981-1995, Source Haley (1998)
– Qsweet : Quantity of Sweetener
– Psweet : Price of Sweetener
– CandyShip: Amount candy shipped
Take Away Points
• Surplus is the value created by trade.
• Surplus Analysis quantifies distortions and
transfers.
• Politics impacts economics and business
strategy
– Sugar Quota has geopolitical ramifications
– HFCS profits depend on quotas
– Anti-trust, taxes, regulations, ...
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